Merkel has gone "all in" on the scare function and though Handelsblatt suggests there IS a 9 point master plan, it could just be the threat of the worst case scenario to justify the very unpleasant medicine they are about to prescribe - the first spoonful of which they administered last night. So what has this piece of socially responsible speculator bashing achieved? Well so far some investment banks have confirmed that they cannot trade sovereign CDS or German bonds due to management restrictions and hence we see headlines such as:
*TWO-YEAR GERMAN GOVERNMENT BOND YIELD HITS RECORD LOW OF 0.422 PCT,
*TRADERS SAY LIQUIDITY DRYING UP IN BUND CASH MKT
Whether the ban is only naked or not doesn't matter. The reality is that desks have stopped making markets in Euro government bonds. The Repo market is already skittish and desk risk limits will inevitably have been cut. The inability of fixed income arbitrage funds to trade without first arranging repo is a big hit to liquidity. Stand by to hear of the next HF blow up...
It seems like the London response was to fade the sell-off: "seems overdone", "it's been done for domestic consumption, not the market" etc etc, and risk was put on. But the German bond market is the world's 2nd largest (the Bund, the world's most liquid future ) and it is hard to see how breaking it can be seen as anything but a deleveraging event. If we see Bunds start to be dumped then the last floating ship of european stability has just been torpedoed.
Even though the world is focussing on Euro grief the AUD is now in all sorts of trouble. Even EUR/AUD is ripping higher. IF we are drawing 2008 comparisons , then it is worth looking at the responses back then of GBP/AUD and EUR/AUD. Whoosh... Meanwhile the SNB continue to buy Europe on the cheap, they already have the worth of a few principalities (if not Greece) in their coffers to the point that banks are reportedly running out of credit lines.
But as this is written the most interesting statement has come out from the French. Finance Minster Lagarde says that:
FRANCE NOT CONSIDERING BAN ON NAKED SHORT SELLING IN EUROPEAN DEBT, UNLIKE GERMANY
Are the gloves coming off?
Or do the French just naturally prefer nail-clippers to scythes ?